ACCOUNTS FOR MANUFACTURING FIRMS
Business can be classified into two types, which are merchandising and manufacturing.
Merchandising is a trading firm / business deals with the buying and selling of manufactured
goods while manufacturing deals with the processing of Raw – materials into finished goods.
E.g. Food processing, cement making.
While Manufacturing firm use labor, plant and equipment to convert Raw – materials to finished
goods.
Both mechanizing and manufacturing firms required to prepare final account at the end of
trading period to show whether they are making profit or loss.
In manufacturing firm, a statement of manufacturing cost is prepared in addition to Income
statement, This statement shows the cost of manufacturing goods (cost of production of
completed goods).
The aim of preparing the statement of manufacturing cost is to determine the cost of a particular
project
Manufacturing costs
In manufacturing business, the costs are divided into different types as follows;
a) Prime costs: These include all direct costs attributed to the production of any commodity
which are Direct materials, Direct labor, direct expenses.
b) Factory overheads/ Indirect manufacturing costs: All indirect costs attributed to the
production are called factory overheads, good example are factory power, factory rent,
depreciation of production machinery etc.
c) Total Factory costs/ Production costs: This is the sum of prime cost and production
overhead, It includes all direct and indirect costs involve in production, therefore
production cost is equal to Prime cost plus factory overheads.
Other costs under manufacturing firms:
a) Administration expenses; Consist of such items as manager’s salaries, legal and
accountancy charges, secretarial salaries and depreciation of accounting machinery.
b) Selling and distribution expenses; Consists of items such as sales staffs, salaries and
commission, carriage outwards, depreciation of delivery vans, advertising and display
expenses etc.
c) Financial charges: These are expenses items such as bank charges and discount allowed.
Types of Stock in Manufacturing firms
There are three types of stocks involved in manufacturing firms:
i)
ii)
iii)
Stock of Raw materials: These are unprocessed materials in the production process
such as cotton, coffee, tea etc.
Work in Progress: There are partly finished goods, are the goods which are not yet
completely produced, they are at the time of annual stock taking, neither in form of
raw materials nor in finished product state.
Stock of finished goods: These are goods which are ready for use, like motor car,
Shirt, Mobile phones etc. There is no any further processing of such goods.
Statement of Manufacturing Costs:
As explained earlier, the main purpose of preparing the statement of manufacturing costs
is to determine the production cost of goods completed, this figure is then transferred to the
income statement where it will replace the entry for purchases.
THE FORMAT OF THE STATEMENT OF MANUFACTUING COSTS
Inventory of Raw materials at start…………………………………………….. xxxx
Add: Purchases of Raw materials ……………………………………………... xxxx
Add: Carriage inwards for raw materials……………………………………… xxxx
Less: Return outwards of raw materials ………………………………………. xxxx
Cost of Raw materials Available for Use …………………………………… xxxx
Less: Inventory of Raw material at close…………………………………..… (xxxx)
Cost of Raw materials consumed………………………………………….... xxxx
Add: Direct wages………………………………………….. xxx
Other direct expenses ………………………………… xxx
Prime Costs
xxxx
xxxx
Add: Indirect Manufacturing Costs:
Fuel and power
xxx
Indirect wages
xxx
Rent of factory
xxx
General factory expenses
xxx
Insurance of factory building
xxx
Depreciation of plant and machinery
xxx
xxxx
xxxx
Add: Opening Inventory of work in progress
xxxx
Less: Closing Inventory of work in progress
xxxx
Production cost of goods completed c/d
xxxx
Example 1:
From the following information prepare the statement of manufacturing cost for the year ended
31 Dec 2008.
1st Jan; stock of Raw materials…………………………………………......8,000/=
31st Dec: Stock of Raw – material………………………………………...10,500/=
Jan; Work in progress……………………………………………………
3,500/=
Dec:. Work in Progress………………………………………………….. ..4,200/=
During the year:
Wages: Direct………………………………………………………….... 39,600/=
Indirect………………………………………………………….. 35,500/=
Purchases of Raw - material………………………………………….. .. 87,000/=
Direct expenses………………………………………………………….... 1,400/=
Lubricants……………………………………………………………….... 3,000/=
Rent of factory…………………………………………………………..... 7,200/=
Fuel and power………………………………………………………........ 9,900/=
Depreciation of factory plant and machine…………………………......... 4,200/=
Internal transport expenses………………………………………….......... 1,800/=
Insurance of a factory building and plant…………………………….......… 1,500/=
General factory expenses…………………………………………........
3,300/=
Solution:
STATEMENT OF MANUFACTURING COST FOR THE YEAR ENDED 31ST
DECEMBER 2008
Opening Inventory of Raw materials
8,000
Add: Purchases of Raw materials
87,000
Cost of Raw materials available of use
95,000
Less: Closing inventory of Raw materials
10,500
Cost of Raw materials used
84,500
Add:
Direct wages
39,600
Direct expenses
1,400
41,000
Prime costs
125,500
Add: Indirect manufacturing costs
Indirect wages
35,500
Lubricants
3,000
Rent of factory
7,200
Fuel and power
9,900
Depreciation of factory plant and machine
4,200
Internal transport expenses
1,800
Insurance of a factory building and plant
1,500
63,100
188,600
Add: Opening Inventory of Work in progress
3,500
192,100
Less: Closing Inventory of Work in progress
Production cost of goods completed c/d
4,200
187,900
FINANCIAL STATEMENTS OF MANUFACTURING FIRMS
1. Income Statement;
This is prepared at the end of accounting period, the same way as it is prepared
under other merchandising firms, it includes the following items
i)
Production cost of completed goods as brought forward from the
statement of manufacturing costs
ii)
Opening and closing inventories for the finished goods
iii)
Sales of finished goods.
iv)
Gross profit/Loss
v)
All administration expenses
vi)
Selling and distribution expenses
vii)
All financial charges
When completed, the Income Statement will show the Net profit or Net Loss earned by
the manufacturing firm.
Example: Prepare the statement of manufacturing cost and income statement from the
following balances of W Miller for the year ended 31 December 2013.
Stocks at 1 January 2013:
Raw materials 25,400
Work in progress 31,100
Finished goods 23,260
Purchases: Raw materials 91,535
Carriage on raw materials 1,960
Direct labour 84,208
Office salaries 33,419
Rent 5,200
Office lighting and heating 4,420
Depreciation:
Works machinery 10,200
Office equipment 2,300
Sales 318,622
Factory fuel and power 8,120
Rent is to be apportioned: Factory 3/4; Office 1/4. Stocks at 31 December 2013 were: Raw
materials Tzs. 28,900; Work in progress Tzs. 24,600; Finished goods Tzs. 28,840.
SOLUTION
STATEMENT OF MANUFACTURING COST FOR THE YEAR ENDED 31ST
DECEMBER 2013
Opening inventory for Raw materials
25,400
Add: Purchases of raw materials
91,535
Add: Carriage of raw materials
1,960
Cost of raw materials available for use
93495
118,895
Less: Closing Inventory for Raw materials
28,900
89,995
Direct labour
84,208
174,203
Add: Factory overheads
Factory fuel and power
Depreciation on work machinery
Factory rent (5200 X ¾)
8,120
10,200
3,900
22,220
196,323
Add: Opening Inventory of Work in progress
31,100
227,523
Less: Closing Inventory of Work in Progress
24,600
Production cost of goods completed c/d
202,923
INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2013
Sales
318,622
Less: Cost of goods Sold
Opening inventory of Finished goods
Add: Production costs of goods completed b/d
23,260
202,923
226,183
Less: Closing inventory of Finished goods
28,840
Gross profit
197,343
121,279
Less: Expenses:
Office salaries
33,419
Lighting and Heating
4,420
Depreciation on Office equipment
2,300
Office rent (5200 X ¼)
1,300
Net Profit
41,439
79,840
MARKET VALUE OF GOODS MANUFACTURED
Sometime manufacturing form would like to know the gross profit it would get to the goods has
been brought in their finished state, The market price of goods produced by a firm is called
market value
If the market value is grate than the cost of production then the firm will get manufacturing profit
and if the market value is less than production cost then the firm will incur the manufacturing
loss.
The manufacturing profit of loss should be transferred to income statement as an income or
expenses respectively.
Example: Prepare the Statement of Manufacturing cost and Income statement from the given
information provided from the books of John & Sons Manufacturing Company.
DR
Stock of Raw – material 1/1/2007
21,000/=
Stock of Finished goods 1/1/2007
38,900/=
Work in progress 1/1/ 2007
13,500/=
Wages (Direct 180,000 factory indirect 145,000)
325,000/=
Royalties
3,500/=
Carriage in wards of (R.M)
3,500/=
Purchases of Raw – material
370,000/=
Productive machinery (cost 280,000)
230,000/=
Accounting Machinery (cost 20,000)
12,000/=
General factory expenses
31,000/=
Lighting
7,500/=
Factor power
13,700/=
Administrative salaries
44,000/=
Sales men salaries
30,000/=
Commission on Sales
11,500/=
Rent
12,000/=
Insurance
4,200/=
CR
General administration exp.
13,400/=
Bank charges
2,300/=
Discount Allowed
4,800/=
Carriage out wards
5,900/=
Sales
1,000,000/=
Account receivables and payables
125,000/=
142,300/=
Bank
56,800/=
Cash
1,500/=
Drawings
20,000/=
Capital as at 1st Jan 2007
296,800/=
NOTE: at 31/12/2007
1.
2.
Stocks:
Raw material
24,000/=
Finished good
40,000/=
Work in progress
15,000/=
Lighting, Rent and Insurance are to be appointed:
Factory 5/6, administration 1/6
3.
Depreciation on productive and accounting machinery at 10% p.a on cost.
4.
Market value of finished goods Tzs. 950,000/=
SOLUTION
JOHN & SONS
STATEMENT OF MANUFACTURING COST FOR THE YEAR ENDED 31ST
DECEMBER 2007
Stock of raw materials 1.1.2007
Add: Purchases
Carriage inwards
21,000
370,000
3,500
373,500
394,500
Less: Stock raw materials 31.12.2007
( 24,000)
Cost of raw materials consumed
370,500
Direct labour
Royalties
180,000
7,000
Prime cost
187,000
557,500
Indirect manufacturing costs:
General factory expenses
Lighting (7,500 x 5/6)
31,000
6,250
Power
13,700
Rent (12,000 x 5/6)
10,000
Insurance ( 4,200 x 5/6)
3,500
Depreciation of productive machinery 28,000
Indirect labour
145,000
237,450
794,950
Add: Work in progress 1.1.2007
13,500
808,450
Less: Work in progress 31.12.2007
( 15,000)
Production cost of goods completed c/d
793,450
Market value of goods completed
950,000
c/d
Gross profit on Manufacturing
156,550
JOHN & SONS
INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2007
Sales
1,000,000
Less Cost of goods sold:
Stock of finished goods 1.1.2007
Add: Market value of goods completed b/d
38,900
950,000
988,900
Less Stock of finished goods 31.12.2007
( 40,000)
Gross profit on trading
51,100
Add: Gross profit on Manufacturing b/d
156,550
Overall gross profit
207,650
Less: Administration expenses
Administration salaries
Rent (12,000 x 1/6)
Insurance (4,200 x 1/6)
General expenses
948,900
44,000
2,000
700
13,400
Lighting (7,500 x 1/6)
1,250
Depreciation of administration computers
2,000
63,350
Selling and distribution expenses:
Sales reps’ salaries
30,000
Commission on sales
11,500
Carriage outwards
5,900
47,400
Financial charges:
Bank charges
2,300
Discounts allowed
4,800
7,100
(117,850)
Net profit
89,800
2. Statement of Financial position:
Any entity has to prepare the statement of financial position at the end of financial
year or at a certain particular date, the same applied to the manufacturing firms,
Example: From the previous example you are required to prepare the Statement of Financial
position of John & Sons Manufacturing Company as at 31st December 2007
Solution:
JOHN & SONS MANUFACTURING COMPANY
STATEMENT OF FINANCIAL POSITION AS AT 31ST DECEMBER 2007
Non current assets:
Tzs.
Tzs.
Productive machinery at cost
280,000
Less Depreciation to date
Administration computers at cost
( 78,000)
20,000
202,000
Less Depreciation to date
( 10,000)
10,000
212,000
Current assets:
Stock: Raw materials
24,000
Finished goods
40,000
Work in progress
15,000
Debtors
142,300
Bank
16,800
Cash
1,500
239,600
Less: Current liabilities
Creditors
Net current assets
( 64,000)
175,600
387,600
Financed by:
Capital Balance as at 1.1.2007
Add: Net profit
357,800
89,800
447,600
Less: Drawings
( 60,000)
387,600
Review Questions:
Question 1. From the following information provided, you are required to prepare the
Statement of Manufacturing cost and the Income statement for the year ended 31st December
2012
Stocks at 1 January 2012
Raw materials 10,500
Goods in course of manufacture (at factory cost) 2,400
Finished goods 14,300
Stocks at 31 December 2012
Raw materials 10,200
Goods in course of manufacture (at factory cost) 2,900
Finished goods 13,200
Expenditure during the year:
Purchases of raw materials 27,200
Factory wages: direct 72,600
indirect 13,900
Carriage on purchases of raw materials 700
Rent and business rates of the factory 1,200
Power 2,000
Depreciation of machinery 3,900
Repairs to factory buildings 1,300
Sundry factory expenses 900
Sales during the year 160,400
Question 2:
The following list of balances as at 31 July 2016 has been extracted from the books of Jane
Seymour who commenced business on 1 August 2015 as a designer and manufacturer of kitchen
furniture:
TZS.
Plant and machinery, at cost on 1 August 2015
60,000
Motor vehicles, at cost on 1 August 2015
Loose tools, at cost
Sales
30,000
9,000
170,000
Raw materials purchased
43,000
Direct factory wages
39,000
Light and power
5,000
Indirect factory wages
8,000
Machinery repairs
1,600
Motor vehicle running expenses
12,000
Rent and insurances
11,600
Administrative staff salaries
31,000
Administrative expenses
Sales and distribution staff salaries
Capital at 1 August 2015
9,000
13,000
122,000
Sundry debtors 16,500 Sundry creditors
11,200
Balance at bank
8,500
Drawings
6,000
Additional information for the year ended 31 July 2016:
(i)
(ii)
It is estimated that the plant and machinery will be used in the business for 10 years
and the motor vehicles used for 4 years: in both cases it is estimated that the residual
value will be nil. The straight line method of providing for depreciation is to be used.
Light and power charges accrued due at 31 July 2016 amounted to Tzs.1,000 and
insurances prepaid at 31 July 2016 totaled Tzs. 800.
(iii) Stocks were valued at cost at 31 July 2016 as follows:
Raw materials Tzs. 7,000 , Finished goods Tzs. 10,000
(iv) The valuation of work in progress at 31 July 2016 included variable and fixed factory
overheads and amounted to Tzs. 12,300.
(v) Two-thirds of the light and power and rent and insurances costs are to be allocated to the
factory costs and one-third to general administration costs.
(vi) Motor vehicle costs are to be allocated equally to factory costs and general administration
costs.
(vii) Goods manufactured during the year are to be transferred to the trading account at Tzs.
95,000.
(viii)Loose tools in hand on 31 July 2016 were valued at Tzs. 5,000.
Required: (a) Prepare a manufacturing, trading and profit and loss account for the year ended 31
July 2016 of Jane Seymour.
Question 3. From the following information, prepare the Statement of manufacturing costs,
Income statement for the year ending 31 December 2016 and the Statement of Financial position
as at 31 December 2016 for the firm of J Jones Limited.
Tzs.
Purchase of raw materials
Fuel and light
Administration salaries
Factory wages
Carriage outwards
Rent and business rates
Sales
Returns inward
General office expenses
Repairs to plant and machinery
Stock at 1 January 2016:
Raw materials
Work in progress
Finished goods
Sundry creditors
Capital account
Freehold premises
Plant and machinery
Debtors
Tzs.
258,000
21,000
17,000
59,000
4,000
21,000
482,000
7,000
9,000
9,000
21,000
14,000
23,000
37,000
457,000
410,000
80,000
20,000
Accumulated provision for depreciation on plant and machinery
Cost in hand
8,000
11,000
984,000
984,000
Make provision for the following:
(i)
(ii)
(iii)
Stock in hand at 31 December 2016: Raw materials Tzs. 25,000 Work in progress Tzs.
11,000 Finished goods Tzs. 26,000.
Depreciation of 10% on plant and machinery using the straight line method.
80% of fuel and light and 75% of rent and rates to be charged to manufacturing.
(iv)
Doubtful debts provision: 5% of sundry debtors.
(iv)
Tzs. 4,000 outstanding for fuel and light.
(v)
Rent and business rates paid in advance: Tzs. 5,000.
(vii)
Market value of finished goods: Tzs. 382,000.